The middle average and price dispersion
In their common formulation, Bollinger Bands place an upper and lower band around a moving average, at a multiple of the standard deviation of prices. With a 20-period simple average and a multiplier of 2, the bands are the average plus and minus two standard deviations.
If the average is 100 and the standard deviation is 2, the bands are at 104 and 96. If dispersion rises to 3 with the same average, the bands become 106 and 94. The period, applied price and calculation method must be consistent across the charts being compared.
Touching a band does not require a reversal
A close near the upper band describes the price’s position within its recent distribution. On its own, it does not show that the market must fall. During a trend, the price can stay near one band for several bars.
Do not interpret the multiplier of 2 as a guaranteed probability that price will stay within the bands. The distribution of market movements, dependence between observations and continuous recalculation of the bands do not support that shortcut.
Define squeezes and breakouts precisely
A squeeze describes a reduction in band width. To turn it into a rule, define a measure, such as percentage width below a threshold chosen before the test. Compression alone does not indicate the direction of any subsequent move.
A breakout strategy might investigate a close beyond the band after compression. A mean-reversion strategy might instead require a move outside the bands followed by a return inside them. These are different hypotheses; do not mix them by choosing retrospectively whichever suits each chart.
Compare conditions, costs and trade management
State whether you use the bands from the closed bar or the bar still forming. For an intrabar entry, use the value available at that exact moment, rather than the final recalculated value. The exit rule must also be defined before observing the outcome.
Compare breakouts and mean reversion over the same period, with the same risk and costs. If the stop depends on band width, adjust the position size to keep the risk budget constant; otherwise the result combines changes in strategy with changes in risk. The catalogue also lists %B and Width, which measure different things from the three price bands.
